Financial Freedom

Introduction

What do you mean by Financial Freedom? Well, everyone has their own definition of financial freedom, depending on their personal goals.

For some, it means having enough savings, investments, and cash to afford the lifestyle they want for themselves and their family. For others, it also means allowing themselves to retire early.

So how can we get to a point where we achieve the desired financial freedom?

There is a way but it is not an overnight magic. I have laid out this road map by providing a realistic and practical roadmap to smart spending, saving, and investing; that will ultimately get you closer to financial freedom

1. No 1 Rule –  Clear your debts

An uptick in your savings will be difficult if you do not have a plan to pay off your debts. It’s no wonder.

The No. 1 rule is this: focus on high-interest loans first. Find out how you can settle these debts by negotiating directly with your bank, or carefully spending an extra portion of your earnings towards settling the unpaid debts, in addition to monthly repayments.

If you have a credit card, you must always pay the full amount due instead of the minimum payment. This will help you avoid hefty interest charges which is both ‘heavy’ on your pocket in this world and the next world (Akhirah!) . P.S. you need to keep Akhirah in your mind at all times.

Also, be careful about borrowing from individuals or companies to pay off your debts. These ‘loans’ can often come with heavy ‘charges’ you might not be able to afford in the future.

2. Automate your savings

One of the wealthiest people in the world, Warren Buffet, shares this advice: “Don’t save what is left after spending; spend what is left after saving.”  

Start to save with a small, manageable amount each month.

To safeguard against the temptation to your saving account, you need to open an Islamic General Investment account and keep your money there.

3. Build your emergency fund

You need an emergency fund to cover anything unplanned – such as personal injury, sudden home repair, or job loss. We should not forget how COVID19 hit us with, where many of our family and friends were made redundant for several months, because they didn’t keep anything for a rainy day.

So how much do you need to set aside to build an emergency fund?

Ideally, it is recommended to have enough to cover 6 to 12 months of your living expenses.

The reason behind this is if you lose your current 9-5 job, or if your business is having a hard time, or if you sustained an injury that made you not able to work for a prolonged time, a reasonable assumption is that you will recover between 6 to 12 months. So, if the emergency fund equates to 6 to 12 months, then it’s quite reasonable that you are safe during this timeframe of hard time.

If that’s too difficult for you, start by building up with at least MVR 2,000 every month, or whatever amount you can afford to save. Some of us receive annual bonuses from our employers, which is an excellent way to build your emergency fund much faster.

It’s advisable to put your emergency fund in a separate bank account, or ideally invest them in a Islamic General Investment Account so that you will earn something whilst it stays in the bank and is a genius way to keep yourself from withdrawing the money out of temptation.

4. Find an insurance plan that covers healthcare

Remember, your immune system declines as you age, but healthcare costs keep rising, which maybe a financial distress and burden for you especially if you have dependents.

It is clear that Aasandha is not sufficient when it comes to health. So you need look into medical protection insurance policies with pre- and post-hospitalization benefits at the very least.

Choose an insurance plan that reimburses medical expenses such as surgeries, ICU stay, and medical check-ups. All insurance policies require a premium that you need to pay, but the return it gives you is peace of mind when it comes to paying medical expenses.

We’ve seen how stressful it is to get sick or hurt suddenly and need a lot of money for medical care that Aasandha doesn’t cover.

5. Prepare for retirement by investing

Where do you start? Right now, probably you have one asset already: your savings on deposit, right?

But think of how much your savings have grown in the last year. It’s probably not a large increase, especially with the low-interest rates of banks. While cash is the safest investment in terms of risk, it has the lowest return.

One of the best long-term investment option is to buy shares in a company.

There are about a dozen publicly listed companies in the Maldives, and most of them pay their shareholders dividends twice a year. Notably some of the profitable companies include include STO, BML, Dhiraagu, Ooredoo, Amana Takaful and a couple more. The dividend isn’t huge, but it’s better than nothing, and it’s something of value that you could save up for your future.

If you don’t like the dividend payout rate, you could sell the shares after a few years when the company is doing well or if you see that the market value of the share is going up. You’ll get a good return on your money in the form of cash gain, whilst covering the investment that you paid to buy the shares at first.

Recently, private companies have been putting Sukuks on the Maldivian market. These Sukuks offer a rate of 7 or 9% for 7 to 10 years. Profits from Sukuk are given out twice a year, just like dividends, which is also a plus point. Sukuk sell for about @MVR 1000 each, so if you buy 10 or more sukuks instead of putting all your money in a savings account, you’ll likely get a much better return.

Yes, you can lose money when you buy stocks, bonds, or sukuks, but a diversified mix of investments can help lower that risk. In theory, if one investment doesn’t pay off, the others can make up for it.

This is why your investment risk profile is such an important part of figuring out how to divide up the assets in your investment portfolio. Always remember that if you want to make a diversified portfolio, you could always talk to a financial adviser.

6. Find multiple ways to increase your earnings

If you currently have one income stream – your job or a small business – you might want to look for ways to earn extra money, such as starting a side hustle or generating income from a hobby.

In contrast to the set or capped earnings of most 9 to 5 occupations, the ultimate reward of becoming an entrepreneur is the possibility of obtaining infinite money.

A prosperous company or successful brand can be handed down from one generation to the next.

So Does wealth make you happy?

Long story short, yes, money and wealth can buy happiness. It can bring you prosperity. Allah declares in the Quran that wealth and children are indeed blessings for this life.  

However, while we talk about money, we should take note that no amount of money can make us happy for long. It is never the quantity of money, rather it is the contentment. Contentment will make you satisfied with whatever is in your pocket.

Your wealth should always be earned through rightful means. You must avoid greed by giving charity as often as possible after your monthly expenses are settled.

In fact, charity increases your wealth because Allah SWT always replaces it with something better and greater.

Abu Huraira narrated from Prophet Muhammad PBUH: The Lord’s commandment for every one of His slaves is, ‘Spend on others, and I will spend on you’. (Bukhari, Muslim 5352)

“The example of those who spend their wealth in the way of God is like a seed [of grain] which grows seven spikes; in each spike is a hundred grains. And God multiplies [His reward] for whom He wills. And God is all-Encompassing and Knowing.”
[Quran 2:261]

Conclusion

Getting a large loan and buying a luxury apartment, driving an exotic car, and using the most recent version of phone are all surefire ways to give the impression of looking rich. You may appear very ‘wealthy’. But behind the scenes, you are drowning. This is a serious problem for some popular entrepreneurs, who’s books are completely on borrowings.

Instead of looking to get rich for nothing, word towards having the financial freedom. And to get the financial freedom that you desire, healthy money management and a good plan for the long term is absolutely the key.

You also need to earn through rightful and lawful means. It’s no good if you earn haram income and spending on your family or even giving charity from it. There are no blessings from it.

Prophet PBUH said: “If a person earns property through haram means and then gives charity, it will not be accepted (by Allah); if he spends it there will be no blessing on it; and if he leaves it behind (at his death) it will be his provision in the Fire” (Reported by Ahmad and others on the authority of Ibn Mas’ood)

While we discuss about financial freedom in this world, it’s important to have enough “wealth” that will serve you in the next world as well. Consider investing into acts of Sadaqatul Jariyah like sponsoring an orphan, constructing a mosque, drilling a well, starting a school, raising children who will one day lead your prayers, etc. This way you will Insha Allah get “financial freedom” in your hereafter as well. After all, that is the goal toward which we should all strive.

Yet there are others who say, “Our Lord! Grant us the good of this world and the Hereafter, and protect us from the torment of the Fire.“
[Quran 2:201]

Reference: https://www.aia.com/en/health-wellness/healthy-living/healthy-finances/Financial-freedom

Check out my article on why we need insurance – https://maadhin.com/2023/01/why-do-i-need-insurance.html

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